Market Wrap - Thanksgiving Holiday

Week of Extremes!

Another week of extremes, but this time the S&P and NASDAQ both experienced strong gains over the holiday shortened week. The S&P scored what might have been its best week ever, increasing 12% by the end the week-end. The NASDAQ was also up strong at 10.9%. But despite the extreme gains the last week, the month of November ended down 7.5% for one of the worst monthly declines on record. The big question is whether last week gains will continue through the end of the year or whether the market will pullback or extend to even greater losses.

Government Action Drives Market Higher!

The government was probably the biggest positive contributor to the market action last week. Government actions included an $800 billion plan to improve consumer credit conditions and the bailout of Citigroup. In addition, Obama's economic team was announced and for the most part was generally well received on Wall Street. The Federal Reserve announced that it was creating a $200 billion facility that will focus on getting liquidity flowing in asset-backed securities markets to help facilitate auto loans, student loans, credit cards, and small business loans. Also, the government announced that $600 billion will be allocated for the purchase of direct obligations of mortgage backed securities backed by Fannie, Freddie, and Ginnie Mae. These efforts are expected to drive down mortgage rates and improve conditions in the housing market bringing relief to the stock market as many analysts consider housing the heart of the crisis. The government also took remarkable action in the bailout plan of Citigroup with a $20 billion preferred stock investment. Citigroup stock increased over 100% during the week as a result. But Citigroup was not the only beneficiary as financial stocks in general rebounded strongly with the announcement.

Economic Data is Poor

Despite strong market gains, the economic data released last week continues to show a troubled economy. Gross Domestic Product was revised downward for the third quarter and durable orders fell 6.2%. Housing stats continue to show decline as existing home sales fell 3.1% and new home sales dropped 5.3%. Consumers are feeling the pinch as reports on personal spending showed declines of 1%. Consumer confidence remains at very low levels as high jobless claims and unemployment weigh on consumers. Volatility as measured by the VIX index did decline last week with the strong market gains and fell below 60 for the first time in weeks. Lower volatility is critical to bringing investors back to the market. We are encouraged with lower volatility, but would caution that the market has moved up 21% over the past five trading days and may be due for a correction. The market has been oversold and desperately needed an upswing, but the gains over the past 5 days may have been a little extreme. We would not be surprised to see a pullback and a return to higher volatility over the near term.

Market Beating Foresight

Next week will be a busy week for economic reports with releases on jobless claims, unemployment, manufacturing, car and truck sales, and service sector activity. The big news will likely center on retail sales data from Black Friday and the holiday weekend. The prospects for consumer spending and employment will also be primary market drivers. However, the government has been the wildcard, as intervention into the private sector to stimulate the economy has been bold and frequent. The hearings will resume for a bailout package for automakers and that result could also drive the market. Volume which has been light with the holiday, but will return in full force next week, and may represent an excellent barometer for where the market may head for the remainder of the year. If the market can hold last week gains in high volume and lower volatility, that would be a strong bias towards a year end rally. Of course, we could also get a pullback from recent gains, or even worse, hit new lows. While volatility decreased significantly last week, we still think volatility will remain at high levels over the near term. We were very encouraged with the market gains last week, but do expect a pullback given the extreme 21% gain over the past five trading days. This is still a very good market for short term trading as market swings are very wide in both directions. As we have mentioned before, the defensive industries should do better over the near term, particularly utilities and healthcare. In addition, companies that provide staples that consumers will still need in difficult times should also do well. We also look for companies that have strong balance sheets, are well capitalized, and have high cash levels. These are the companies that will survive and even prosper in difficult economic times. The breakout stocks that currently show on our buy list are Gentiva Health (GTIV), Emergency Medical SVCS (EMS), ACETO Corp (ACET). Emergent Biosolutions, which had been on our buy list, has already moved up 30% since we first reported on it, so interested investors should wait for a consolidation period or even a pullback before investing. Overall, equities remain at compelling price levels despite an economy that has a long way to go before it gets better. We are planning to invest some of our cash into stocks over the next few weeks as we find good opportunities, and would suggest that investors sitting on cash do the same. Patience will reward the long term investor as positive momentum and confidence will eventually return. Investors buying stocks at these levels will be rewarded in 2-3 years even if they are early on the market bottom. Despite a difficult year, all of our portfolios still show positive returns since their inception, which is truly exceptional given that the corresponding market returns all show significant losses.